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CBI ECONOMIC FORECAST MAY 2016 (EMBARGOED UNTIL MONDAY 16TH MAY) GDP The UK economy saw a softer start to 2016, with GDP growth coming in at 0.4% in Q1—down from 0.6% in Q4 2015, and lower than we expected in our previous forecast in February (0.6%). Business surveys point to momentum remaining sluggish going into Q2. Some of the slowing can likely be attributed to uncertainty ahead of the EU referendum in June causing business decisions and activity to be put on hold. The impact of this uncertainty can also be seen elsewhere: the pound has fallen by 9% since late 2015; business sentiment has waned; uncertainty over public policy has spiked; and investment intentions have deteriorated across several surveys. We continue to expect growth to be driven by the dual engines of household spending and business investment over the next few years. However, we have downgraded our forecast for GDP growth for both 2016 and 2017. In 2016, (2.0%, from 2.3% in February), the downgrade mostly reflects the softer start to this year, signs that uncertainty is bearing down on plans for investment, and some revisions to historical data. In 2017, slower growth in real incomes weighs on household spending while export growth is depressed by sluggish global growth and competitiveness. The most imminent risk to the outlook is that uncertainty ahead of the EU referendum could have a more pronounced impact on activity than we have seen to date. Globally, the UK remains exposed to underwhelming economic momentum in both advanced and emerging economies. And although global financial markets have calmed since January, there remains the risk of more volatility ahead, particularly given the increasing fragility of financial conditions in China. Investment Overall, surveys of investment intentions have shown a deterioration in investment plans, particularly in the services sector. Some of this is likely to be related to uncertainty ahead of the EU referendum. Although our April investment intentions data for the manufacturing industry actually strengthened, anecdote from the sector suggests some specific factors at play – in particular, replacement spending in the food & drink sector (following flood-related damage earlier in the year) and buildings investment by chemicals manufacturers looking to expand production on the back of solid export demand. Taking into account the range of investment intentions data, we expect some softening in business investment growth in Q2, which drives some of the downgrade to our forecast in 2016. We expect a recovery in investment thereafter, before growth settles at rates closer to the pre-crisis average in 2017. Even with the softening in Q2, business investment still accounts for a major portion of GDP growth in our forecast: around a quarter in 2016, and a third in 2017. Households Household spending grew strongly over 2015 (by 2.8% - the fastest since 2007), with purchasing power boosted by very low inflation. Consumer activity has generally remained strong since, although some indicators have shown signs of tailing off. Notably, slower nominal wage growth has taken some of the edge off real incomes growth, and consumer confidence has ticked lower amid growing concern over economic conditions in the year ahead. Nonetheless, a slight slowing in growth is occurring from a high base and the underpins to consumer spending remain solid. Continually low inflation and a recovery in wage growth will continue to support households in 2016, driving further robust growth in spending this year. We expect household spending growth to ease in 2017, as higher inflation eats into real incomes. However, it is still expected to be a mainstay of economic growth, driving almost half of the expansion in GDP next year. Trade There are tentative signs that the fall in the pound since November is feeding through to exports. Our April Industrial Trends Survey shows that manufacturers’ export order books have improved moderately, and competitive pressures have alleviated. However, we still do not expect any support from net trade to GDP growth ahead. Slower world trade and sluggish global momentum weigh on exports in our forecast, offsetting any boost from a lower pound. Meanwhile, the relative strength in domestic demand will shore up import growth, thus ensuring that net trade remains a drag on GDP growth. Even though we expect less of a negative contribution in 2016 (-0.2ppts) relative to our February forecast (-0.5ppts), this is down to a larger downgrade to import growth than exports, rather than a material pick up in export growth. Monetary policy and inflation Our outlook for inflation is broadly unchanged: we still expect the CPI rate to move gradually back to the Bank of England’s 2% target in 2017, as the past decline in fuel prices falls out of the year-on-year comparison. But with both global and domestic inflationary pressures still muted, there seems to be little impetus for a rate rise. As a result, we have pushed out our timing of the first rate rise to Q2 2017, two quarters later than our previous forecast. CBI ECONOMIC FORECAST MAY 2016 CBI UK economic forecast 2016 12mth% unless otherw ise stated 2017 2015 2016 2017 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Real GDP 2.3 2.0 2.0 2.1 1.9 2.0 2.1 2.2 2.2 2.0 1.8 Manufacturing output -0.3 -0.2 1.0 -1.2 -0.5 0.3 0.7 1.3 1.2 0.9 0.7 Household consumption 2.7 2.5 1.5 2.7 2.5 2.6 2.3 1.9 1.6 1.3 1.1 Government consumption 1.5 0.0 0.6 1.2 0.2 -0.7 -0.7 0.1 0.6 1.0 0.9 Household savings ratio 4.2 4.0 3.1 4.5 4.2 4.2 3.1 3.7 3.6 3.5 2.5 4.1 4.0 5.2 3.4 1.8 3.3 7.3 5.4 6.5 5.3 3.7 Growth & Consumption Investment Fixed investment of which: Total business 5.2 5.3 6.8 4.7 2.8 3.7 10.0 6.5 9.0 7.5 4.2 General government 0.5 -2.0 1.7 -5.5 -3.0 -1.8 2.6 1.7 2.5 1.7 0.8 Manufacturing 4.3 -3.3 6.2 -8.0 -5.8 -3.4 4.7 5.8 6.6 8.0 4.2 Exports 5.1 1.7 3.6 2.5 0.4 1.5 2.2 2.9 3.3 3.9 4.4 Imports 6.3 2.2 3.2 0.8 4.2 2.0 2.1 3.3 3.3 3.3 3.0 Current account (£bn) -96.2 -85.9 -69.0 -22.5 -22.1 -21.2 -20.1 -18.9 -17.7 -16.8 -15.6 % of GDP -5.2 -4.5 -3.5 -4.8 -4.6 -4.4 -4.1 -3.9 -3.6 -3.4 -3.2 CPI 0.0 0.9 1.9 0.3 0.7 1.0 1.5 1.9 1.9 1.9 2.0 RPI 1.0 1.9 2.8 1.4 1.8 2.0 2.4 2.8 2.7 2.9 2.9 RPIX 1.0 1.9 2.6 1.5 1.9 2.0 2.3 2.8 2.6 2.6 2.6 Producer output prices -1.7 0.4 2.7 -1.0 -0.3 0.8 2.1 2.5 2.6 2.7 2.7 Unemployment (ILO, mn) 1.78 1.71 1.76 1.68 1.69 1.71 1.74 1.74 1.76 1.75 1.78 Unemployment rate (%) 5.4 5.0 5.1 5.1 4.9 5.0 5.1 5.1 5.1 5.1 5.2 Unemployment (CC, mn) 0.79 0.74 0.77 0.73 0.71 0.73 0.76 0.75 0.78 0.77 0.79 External Trade Prices Labour Market Claimant count rate (%) 2.3 2.1 2.3 2.1 2.1 2.2 2.2 2.2 2.3 2.3 2.4 Employment (ILO, mn): 31.19 31.51 31.26 31.46 31.51 31.53 31.54 31.48 31.39 31.22 30.95 2.6 3.0 2.7 1.7 3.4 3.5 3.2 3.0 2.8 2.7 2.4 Net borrowing (£bn) 74.0 63.3 54.8 % of GDP 3.9 3.3 2.7 Debt/GDP (%) 83.5 83.4 82.8 2015 2016 2017 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 3.0 3.1 3.5 3.5 3.1 3.0 2.7 3.1 3.6 3.6 3.7 Average earnings* * Including bonuses Public Sector** *2015/16; 2016/17; 2017/18 excludes APF Forecast Assumptions Global GDP 2016 2017 UK Bank Rate 0.50 0.50 0.69 0.50 0.50 0.50 0.50 0.50 0.75 0.75 0.75 Oil prices $ per barrel 52.4 40.7 45.9 33.7 41.8 43.3 44.2 45.0 45.7 46.2 46.6 GBP Trade-weighted index 91.4 85.5 89.6 87.0 83.4 85.2 86.1 87.6 89.2 90.4 91.1 USD/GBP 1.53 1.39 1.43 1.43 1.38 1.38 1.36 1.39 1.42 1.45 1.47 EUR/GBP 1.38 1.28 1.35 1.30 1.25 1.28 1.30 1.32 1.34 1.36 1.37